Haworth & Lexon Law Newsletter

No.6, 2006 (Total:No.56) Jun. 20th, 2006Edited by Haworth & Lexon

"Haworth & Lexon Law Newsletter" is issued every month, mainly introducing the legal change in the fields of Corporate, Securities, Foreign investment, Intellectual property rights, International trade etc. with necessary comment. All the comments do not mean the legal opinion of our firm and the firm does not have any legal liability for such comment. Should you have any interest in any topics or any questions please feel free to contact the firm. You will be expected to have satisfactory response from the professional attorney of our firm.

Guidelines

?Latest Laws and Regulations

Supplementary Provisions on the Establishment of Investment Companies by Foreign Investors

Regulation on the Protection of the Right to Network Dissemination of Information

Notice about Implementation of the Executive Opinions on Some Issues Concerning the Application of Law Governing the Examination, Approval and Registration of Foreign-funded Companies

Notice of the Ministry of Finance and the State Administration of Taxation on Adjusting the Scope of Tax Refund Policies for the Purchase of Home-made Equipment for Foreign Invested Projects

旾P Cases

Legalization was Needed for Evidence Formed in Hong Kong, even if it was Acquired in the inland of China

Notices sent by Courier Service are Effective

The Actual Exclusive User of Copyright may Sue the Infringer

Another Content of Proof of the First Instance may be the new Proof of the Second Instance

Final Judgment on Xiushuijie Company Case: Joint Liabilities shall be Borne by Them

旳nalysis of Laws

Measures for Administration of Initial Public Offer and Listing of Stocks Came into Effective on May 18, 2006

旵ase Analysis

Parties of a Commissioned Contract Have A statutory right of termination Statutorily

Ministry of Commerce promulgated 揝upplementary Provisions on the Establishment of Investment Companies by Foreign Investors?(Hereinafter referred to as 揝upplementary Provisions? on May 26, 2006, which came into effective on July 1, 2006. The comparisons between these new provisions to the previous ones are as follows for a better understanding of the Supplementary Provisions.

The previous provisions provided that contributions to investment companies should be paid up within 2 years from the issuance of business licenses. But the Supplementary Provisions provides that the contribution shall not be less than USD 30 million within 2 years, and 搕he remaining capital contributions in the registered capital shall be paid off within 5 years from the day when the business license is issued.?/P>

Article 10 of the previous provisions allowed the investment companies undertake contracted out service by its parent company and affiliates, and the Supplementary Provisions allows the investment companies undertake service contracted out by overseas companies.

Supplementary Provisions provides that an investment company may handle tax refunds when exporting products, and it allows an investment company to sell at home the commodities it imports or purchases at home by way of commissioned agents (excluding auctions) or wholesale.

It is a great breakthrough to allow the investment companies to invest in listed companies. That means the foreign companies may invest in A Shares and become foreign shareholders of such companies by setting up investment companies in China .

If a foreign investor uses the Renminbi profits it has obtained within China or the lawful Renminbi proceeds it has obtained due to share transfer, liquidation, or etc as the registered capital of an investment company it contributes (or for increasing capital), the investment company may use all or part of this portion of registered capital to establish enterprises in China. The investment company may apply for going through foreign exchange registration on foreign-funded enterprises and confirmation request for capital verification to the department of foreign exchange administration at its locality, with necessary documents. But if a Sino-foreign investment company sets up domestic enterprises with the Renminbi contributed by Chinese investors, the aforesaid procedures are not needed.

Supplementary Provisions allows an investment company that is determined as a regional headquarters to undertake operational leasing and finance leasing businesses, and it also allows to entrust other domestic enterprises to produce/process products and sell them both at home and abroad, and undertake the business of processing trade on the commission basis with all the products being sold overseas ?

Supplementary Provisions also requests an investment company, before June 1 each year, to report relevant information of the previous year to the Ministry of Commerce. It will be punished if failure to do so.

Regulations on the Protection of the Right to Network Dissemination of Information

The State Council promulgated 揜egulations on the Protection of the Right to Network Dissemination of Information?on May 18, 2006, which will come into effective on July 1, 2006.

According to the definition provided in the Regulations, right to network dissemination of information refers to the right to provide the works, performance and audio-visual products to the public in a wire or wireless manner so that the public may get access to the works, performance and audio-visual products at the time and place that the relevant owner has chosen.

The Regulations provides if an organization or individual intends to provide the general public any other person's works, performance or audio-visual products through the information network, it shall obtain the owner's permission and pay the relevant remunerations. In the absence of an owner's permission, no organization or individual may purposely delete or change the electronic information on the right administration of works, performance and audio-visual products as provided to the general public through the information network, or provide any work, performance or audio-visual product whose electronic information on right administration has been deleted or changed in the absence of the owner's permission to the general public who obviously know or should have known the deletion or change through the information network.

The Regulations provides if anyone provides any works through the information network under 8 circumstances, he may be exempted from obtaining the owner's permission as well as paying the relevant remunerations.

Notice about Implementation of the Executive Opinions on Some Issues Concerning the Application of Law Governing the Examination, Approval and Registration of Foreign-funded Companies

State Administration of Industry and Commerce promulgated 揘otice about Implementation of the Executive Opinions on Some Issues Concerning the Application of Law Governing the Examination, Approval and Registration of Foreign-funded Companies?on May 26, 2005.

The Notice requests a board of director of a Sino-foreign equity joint or Sino-foreign contractual limited company to be the power organ of the company, and other foreign invested company or wholly foreign owned company shall be in accordance with the regulations of Company Law. These requirements are not compulsively applied to articles of associations of the companies set up before January 1, 2006.

The notarization and certification documents of the subject qualification certificate or identity certificate of a foreign investor may be submitted according to the requirements of revised Design of Registration Book of Foreign-Funded Enterprises and the Requirements.

The Notice gives specific explanation on representative office issue. It provides that the existence of the offices of a foreign invested company is not prohibited by law. A foreign invested enterprise may directly establish an office upon the need of business operation without going through industry and commerce registration.

Ministry of Finance and State Administration of Taxation promulgated 揘otice on Adjusting the Scope of Tax Refund Policies for the Purchase of Home-made Equipment for Foreign Invested Projects?on May 10, 2006.

The enterprises who may enjoy the tax refund for the purchase of homemade equipment may be divided into three group s: 1 VAT general taxpayer foreign invested enterprises, 2 the non-VAT general taxpayer foreign invested enterprises who engage in the transportation and the development of ordinary houses, 3 the non-VAT general taxpayer Sino-foreign contractual joint ventures who engage in exploration and exploitation of the marine petroleum.

Homemade equipments purchased by foreign invested projects that are within the encouragement scope of 揋uiding Catalogue for Foreign Investment Industries ?and the 揅atalogue for Priority Industries for Foreign Investment in Central-Western Region? may enjoy tax refund policy. But if the homemade equipment is within 揅atalogue for Imported Commodities Imported Commodities for Foreign Invested Projects Not Exempted from Tax? then the tax will not be refunded.

Beijing Higher People's Court made the final judgment in the case of Shanghai Pudong Jinhuan Medical Equipment Co., Ltd. vs. Patent Reexamination Board of the State Intellectual Property Office regarding an administrative dispute on patent invalidation on March 30, 2006, which confirmed the validation of the patent.

Zhang Shangqian was the patent holder of the utility model patent No. 97220038. The appellant applied to the appellee for invalidation of the patent on the ground that it was not novel or inventive. On August 5, 2004, the appellant made the ruling No. 6122 that maintained the validation of the patent. The appellant protested against the ruling and brought an administrative case to Beijing No. 1 Intermediate People's Court. The court maintained the ruling.

The appellant thought Annex 1.4, namely the sample of the products made by German B. Braun Company, which was provided by the appellant, was acquired in inland of China in a public manner, so the relevant legalization procedure should not be necessary.

The court held that Annex 1.4 had been printed in Hong Kong, so it was considered being formed in Hong Kong . According to the applicable regulations on proof in administrative cases, the parties shall carry out legalization procedures if the proof was formed in Hong Kong, whether it was acquired in the inland of China or not. Therefore, the evidence was not adopted by the court and the court maintained the validation of the patent.

Beijing Haidian District People's Court made the first judgment in the case of Beijing Galaxy Changxing Film & TV Broadcast Co., Ltd. vs. Capital Normal University regarding creation contract dispute on May 20, 2006, which ruled that the Plaintiff breached the contract, so the petitions of the plaintiff were rejected.

The plaintiff stated that it signed a contract with China Children Literature & Art Development Center, an affiliate of the defendant (Hereinafter referred to as 揟he Center?, and the contract stipulated that The Center would write the playbook of the previous 50 series of the cartoon 揝tories about Three Countries?and the play book would be delivered before December 31, 2005. The plaintiff paid RMB 83000 as the down payment on the 7 th day after the execution of the contract. But the defendant had not delivered the playbook until January 31, 2006. The defendant had breached the contract.

The defendant argued that The Center completed the writing on December 25, 2005 and notified the plaintiff to pay RMB 83000 and take the playbook. But the plaintiff did not perform its obligation. So The Center notified the plaintiff to terminate the contract on January 26, 2006.

The plaintiff said it had not received the two mails, and it considered that the defendant could not prove that the contents of the mails were the two official letters and the termination notice, and that the recipient was not the staff of the plaintiff and the recipient did not have the authority to receive it. But the court held that there were specific mail address of the plaintiff and the mobile phone number of Liu Wei on the two courier service mails. Someone did have received the mails according to the enquiry at the post office, and the mails were not returned. Though it may not be Liu Wei who received the mails, according to the peculiarity of the courier service, once the mails were sent to the address of the plaintiff and received by the relevant persons, they should be deemed as served upon the plaintiff. What is more, from the corresponding relationship between the details written on the envelope of the courier service and the specific documents in question, it can be inferred that the documents in the mails were the aforesaid official letters and the notice.

Therefore, the court held that the plaintiff had breached the contract, so its petitions were not supported.

Beijing Haidian District People's Court made a judgment in the case of Harbin Industrial University Keruan Stock Company (Hereinafter referred to as 揔eruan Company? and Jinyao Commercial Network Co., Ltd. (Hereinafter referred to as 揓inyao Company? vs. Beijing Tianshimei Medical Information & Technology Co., Ltd. (Hereinafter referred to as 揟ianshimei Company? and Ma Xiuyan regarding infringement of copyright of software and return of property dispute on March 29, 2006. The infringement was held to be established.

The two plaintiffs stated that Keruan Company was the copyright holder of 揝oftware System V1.0 of State Medical Statistics Reporting Platform?(Hereinafter referred to as 揜eporting Software?. Jinyao Company was licensed to be the exclusive user of the software. Ma Xiuyuan was once the deputy general manager of Jinyao Company and he availed himself of his position to copy the Reporting Software and delivered it to Tianmeishi Company upon his resignation. Tianmeishi Company used the software in the operation of the medical economic statistic website www.smei.net.cn . Tianshimei Company and Ma Xiuyan used the software without permission and they infringed the copyright of Keruan Company and the exclusive right to use the copyright by Jinyao.

The court held that as the right holder of Reporting Software, Keruan Company had the right to license Jinyao Company to use the software. But the Economic Operation Office of State Economic and Trading Commission (Hereinafter referred to as 揈conomic Operation Office?, the consigner of the software, also had the right to use. After cancellation of Economic Operation Office, the Economic Operation Office of State Economic and Trading Commission should have such rights, as the successor of Economic Operation Office. So the court thought Jinyao Company was not the exclusive user of the software. However, Economic Operation Office of State Economic and Trading Commission did not use the software, so Jinyao Company was the actual exclusive user of the software, and it had the same interests as Keruan Company. So Jinyao Company may sue Ma Xiuyan and Tianmeishi Company with Keruan for infringement of software copyright.

Shanghai Higher People's Court made the judgment in the case of Jingjiang Xiangyu Hardware Making Co., Ltd. (Hereinafter referred to as 揦iangyu Company? vs. Wang Ruiming and Shanghai Jiuan Rivet Joint Technology Co., Ltd. (Hereinafter referred to as 揓iu'an Company? regarding infringement of patent on March 3, 2006. The infringement was not held established as the disputed technology was a public technology.

Wang Ruiming applied to State Intellectual Property Office for utility model patent of 揳nti-counterfeit rivet?on October 10, 2000, which was granted on November 28, 2001. On March 30, 2002, Wang Ruiming concluded a licensed use contract with Jiuan Company, which licensed Jiu'an Company to use the patent exclusively in China . Jiu'an Company thought that the 揓inquan?rivet, sold by Xiangyu Company infringed its right, so it filed the suit to the court. Xiangyu Company submitted one bottle of Xiburenjia drink, Earch Jinshiyuan Drink, New Century Jinshiyuan Drink and Star Jinshiyuan Drink and the invoices to the court to prove that 揓inquan?rivet was public technology. In the hearing, Wang Ruiming and Jiu'an did not confirm the authenticity of the invoice. They only confirmed that New Century Drink had been produced in July 2000.

The court in the first instance thought it was not sufficient to prove that the rivet had been in public use before the application date, only by submitting the date of the production and filling of the drinks. Therefore, the court thought 揓inquan?rivet infringed upon the patented products, and Xiangyu Company should be liable for it.

The appellant thought that the date printed on the external packages of the drink bottle certified that the publication date of the rivet was June 16, 2000, but the application date of the patent was October 10, 2000. So the technology in question had been public before application. Therefore, it did not infringe upon the patent.

The court held that Xiangyu Company had submitted Xiburenjia Drink in the first instance, but the packages had not been opened then. Xiangyu submitted it to the court of the second instance and asked the court to open it to certify the facts of the case. The facts confirmed by the interior of the package was supplementary to the evidence of the first ruling, so it was adopted as new evidence.

Therefore, the court held that the rivet was public technology and Xiangyu Company did not commit infringement.

Beijing Higher People's Court made the final judgment in the case Beijing Xiushuijie Attire Market Co., Ltd. (Hereinafter referred to as 揦iushuijie Company? vs. Channel Joint Company (Hereinafter referred to as 揅hannel Company? regarding trademark infringement dispute on April 18, 2006, which recognized that Xiushuijie Company facilitated the acts of Huang Shangwang, the defendant in the first instance, and the infringement was held established.

The court in the first instance thought that as the manager of Beijing Xiushuijie Attire Market, Xiushuijie Company had the obligation to retain, in a timely manner, the others from infringing a trademark of a third party. Channel Company notified Xiushuijie Company when it purchased the infringing products, and the notice clearly stated the stall number of Huang Shangwang. But Xiushuijie Company did not take any measures to refrain Huang Shanwang from committing infringement. Therefore, the company facilitated Huang Shangwang' infringement. According to relevant laws and regulations, Xiushuijie Company should take joint liabilities with Huang Shanwang.

The appellant thought that as the lessor of the market, its main obligation should be to provide property management and publicity services, in addition to providing leased premises. The judgment of the first instance excessively enlarged the scope of its obligations and violated relevant regulations. What is more, it had no purpose of joint infringement and had not provided any facilities for Huang Shanwang.

The court held that from the rights and obligations provided in the lease contract, Xiushuijie Company had the rights to manage the market, to decide the business hour, business scope etc., to adjust the above items according to the requirements of the market, and to supervise the operation of the lessees. In addition, it had the obligations to maintain the market order, to prevent misconducts, and to report to the relevant administrative authority. After receiving the lawyer's letter, Xiushuijie Company did not contact the lawyers in time; neither did it take any effective measures to prevent the infringement, which enabled Huang Shanwang to continue to sell the products that infringed upon the products of Channel Company. Xiushuijie Company had the intention and facilitated the infringement.

In summary, Xiushuijie Company should assume joint liability with Huang Shanwang for its infringement.

Analysis of Laws

Measures for Administration of Initial Public Offer and Listing of Stocks Came into Effective on May 18, 2006

揗easures for Administration of Initial Public Offer and Listing of Stocks (Hereinafter referred to as 揗easures? came into Effective on May 18, 2006.

The Measures was launched since the share-trading reform has been carried out for one year, and for reopening the initial public offer, which has been suspended for 21 months. Before that, Company Law, Securities Law and Measures for Administration of Securities of Listed Company were promulgated successively.

The Measures adopted good practice and regulations out of China . In general, it is a self-reflection on securities market, and a basis for further standardizing the securities market in future. The Measures opens the door to good and promising companies. Of course, it also has requirements on qualifications for issuer, and the independence of assets, personnel, finance, organization and business. The important changes and specific contents of the Measures are as follows.

1 The Measures cancel the limit on the period between one issuance and the next. The new Company Law and Securities Law cancel the regulations that the period shall be more than 1 year, and the Measures does not have forbidding provision on introducing new shareholder to the company within 12 months before the issuance, which is useful for listed companies to introduce investors according to their own conditions.

2 The Measures cancels the requirement for one-year tutorship period. The cancellation of it will help the enterprise to expedite the issuance, improve the effectiveness, and is better for the interests of companies.

3 The Measures amends financial index for the issuer of initial public offer. (1) Having a positive net profit of over 30 million yuan accumulatively for the latest 3 accounting years, which are calculated on the basis of the comparatively low net profits upon deduction of non-regular profits/losses; (2) Having a net cash flow of over 50 million yuan accumulatively, or having a business income of over 0.3 billion yuan accumulatively for the latest 3 accounting years; (3) Having a total amount of stock capital of not less than 30 million yuan before issuance; (4) The proportion of its latest intangible assets (upon deduction of its land use right, right to aquatic breeding and right to mining) in its net assets not being higher than 20 %; and (5) Having no uncovered deficit in the latest period.

4 The Measures cancels the limits that the raised amount shall not be twice the net assets of the companies. The Measures allows the issuer and investors in their sole discretion, to decide the amount, which makes the companies raise money considering their own conditions.

5 The Measures cancels the limits that the percentage of related transactions shall not be more than 30%. But it makes stricter requirements on information disclosure by issuers. Investors may make investing decisions according to the disclosed information. The Measures provides if the issuer has substantial associated transactions on purchase of raw material and sales of products with controlling shareholder, actual controller and any other enterprises controlled by it, it shall disclose business and financial status of the controlling shareholders or actual controllers in the prospectus specifically.

6 The Measures makes much stricter requirements on independence of issuer, particularly on independence of assets, personnel, organization and business. (1) An issuer shall have a complete set of operations and be capable of independently conducting market-based business operations. (2) An issuer shall have integrated assets. A production enterprise shall be equipped with the relevant production system, auxiliary production system as well as supporting facilities corresponding to its business operations, have the right to own or use the land, premises and machines and facilities relating to its business operations as well as the ownership or use right to its trademarks, patent technologies and know-how, and have an independent purchase system of raw materials and sales system of products. A non-production enterprise shall be equipped with a set of operations as well as the relevant assets relating to its business operations. (3) An issuer shall have personnel independence. Such senior managers as the general manager, deputy-manager, financial principal and secretary of the board of directors shall not hold any post other than director or supervisor in, or collect any salary from, its controlling shareholder, actual controller or any other enterprise under its control. The financial staff of an issuer shall not hold any part-time post in its controlling shareholder, actual controller or any other enterprise under its control. (4) An issuer shall have financial independence. An issuer shall establish an independent financial verification system, be capable of making independent decisions and have a standard financial accounting system as well as financial management on its branches and subsidiary companies. An issuer shall not share any bank account with its controlling shareholder, actual controller or any other enterprise under its control. (5) An issuer shall establish and improve an internal operating and management system, independently exercise its power of business operation and management, and shall not have any organization mixed up with its controlling shareholder, actual controller or any other enterprise under its control. (6) An issuer shall enjoy business independence. An issuer shall carry out its business operations independently from its controlling shareholder, actual controller or any other enterprises under its control, and shall not have any horizontal competition or obviously unfair associated transactions with its controlling shareholder, actual controller or any other enterprise under its control. (7) An issuer shall have no any other serious defect in independence.

In addition, The Measures makes specific provisions on standardization and operation, finance and accountant, application of raised money, issuance procedure, information disclosure, and supervision and punishment and so on.

Analysis of Cases

Parties of a Commissioned Contract have A right of termination Statutorily

The applicant of this case was Shanghai Punch Trading Co., Ltd (Hereinafter referred to as 揝hanghai Punch?, and the appellee was Punch ( Dalian ) Co., Ltd (Hereinafter referred to as 揇alian Punch?. The case was regarding commissioned contract dispute.

The ascertained facts were as follows. In July, 2000, the legal representative of Japan Punch Industrial Co., Ltd (who was also the legal representative of Dalian Punch) and Chongxuan Liang concluded an agreement on establishment of Shanghai Punch, which confirmed that Shanghai Punch was the sole sales representative office of Punch Group and Chongxuan Liang was the shareholder, director and chairman of board of Shanghai Punch. On July 28, 2000, Shanghai Punch was established and Chongxuan Liang was the majority shareholder and legal representative of it.

In August 2000, a Business Agreement was concluded between Shanghai Punch and Dalian Punch. Dalian Punch commissioned Shanghai Punch on sales matters in China (Taiwan, Hong Kong and Macau were excluded) as follows: Dalian Punch was the production base of Punch Group, and it had obligation to provide products according to standards made by Punch Group to Shanghai Punch. As a sales representative office, Shanghai Punch had obligations to develop market in China for products of Punch Group and Dalian Punch. Dalian Punch commissioned Shanghai Punch to sell products produced by it, and it would not commission or build any other sales office or channel. Shanghai Punch would be responsible for building, managing and operating sales offices and channels, and it might purchase products from other providers. Dalian punch would provide products at a most preferential price, and provide and transfer rights of sales, use of trademark and other intangible assets for free. Shanghai Punch warranted that it would use the right of sales, trademark and intangible assets properly. The term of the agreement was 20 years, from September 1, 2000 to August 31, 2020.

The parties cooperated thereon. On April 19, 2002, the legal representative of Japan Punch withdrew the commission on Chongxuan Liang. Dalian Punch sent emergent notices to clients, which restated that Dalian Punch would not authorize Shanghai Punch to sale products on the same date. Dalian Punch set up business departments in many areas in that month.

Until April, 2002, the expenses on establishment and operation, and promotion of Shanghai Punch were 1,660,000 RMB.

Therefore, Shanghai Punch brought the case to the court, which applied the court to make judgment on withdrawal of business departments set up by Dalian Punch without permission of Shanghai Punch, public apology and rehabilitation of reputation, and a compensation of 50,000,000 RMB. The court of first instance (Liaoning Higher People's Court) made the judgment which ordered the defendant to pay a compensation of 1,660,000 RMB and rejected the other petitions made by the plaintiff. The Supreme People's Court made the final judgment which confirmed the previous judgment on November 22, 2005.

3 Whether the available profit loss of Shanghai Punch should be protected.

The Supreme People's Court held that the Business Agreement, executed in August 2000 between Dalian Punch and Shanghai Punch established a commissioned contract relationship between Dalian Punch and Shanghai Punch.

The commissioned contract was concluded between the parties basing on their trusts on each other, and it may be terminated for loss of trust. Article 410 of Contract Law provided that either consignor or consignee may terminate the commissioned contract at any time. If the termination of contract incurs loss to the other party, unless it can not be attributed to the party, the party shall make compensation to the other.?Therefore, Dalian Punch had legal right of termination of the aforesaid agreement and it needed no permission from Shanghai Punch. But it should be liable for the loss incurred to Shanghai Punch thereof.

On the issue whether Dalian Punch should compensate for available profit loss, the Supreme People's Court held although the party shall assume civil liability for the exercising of legal termination right, the nature, degree and effect should not be the same as liabilities arising from breach of contract by the party. Therefore, the court does not support the petition for available profit loss.

(This case was published in the bulletin of Supreme People's Court and it shall have guiding meanings.)